China's property crisis is spilling over into the financial sector
China's leading wealth manager, Zhongzhi Enterprise Group, told investors it is "severely insolvent" with liabilities reaching up to 460 billion yuan (Rs. 5.4 lakh crore). This development has sparked renewed fears about the nation's property debt crisis affecting the broader financial sector. The Beijing-based company, heavily involved in China's real estate market, apologized to investors in a letter that disclosed its total liabilities of approximately 420 billion yuan (Rs. 4.98 lakh crore) to 460 billion yuan (Rs. 5.4 lakh crore).
Zhongzhi's assets v/s liabilities
Zhongzhi's letter showed that its estimated total assets are around 200 billion yuan (Rs. 2.35 lakh crore), significantly less than its liabilities. The company's assets mainly consist of long-term debt and equity investments, making it challenging to liquidate them and generate returns. "Initial inspections show that the group is seriously insolvent and has significant continuing operational risks. The resources available for debt repayment in the short term are much lower than the group's overall debt scale," the firm stated.
Zhongzhi's rising troubles could reignite concerns of a ripple effect
As a key player in China's $3 trillion shadow banking sector, Zhongzhi's rising troubles could reignite concerns about a ripple effect on the wider economy. Wealth managers like Zhongzhi, linked to shadow banking, typically operate outside many commercial banking regulations. They primarily channel earnings from retail investors' wealth products into real estate developers and various sectors. Zhongzhi first raised alarm in July when one of its trust-company affiliates defaulted on payments to customers holding high-yield investment products.
Potential for regulatory intervention
An investor in a Zhongrong trust product, identified only as Xu, told Reuters, "The hole in its books is enormous. The firm has been in a mess." Christopher Beddor, Deputy Director of China research at Gavekal Dragonomics, thinks that financial regulators will likely intervene aggressively if Zhongzhi's problems begin to spread. However, he also pointed out that the trust industry represents only about 5% of the total financial system, so issues there are not necessarily critical.
Zhongzhi has hired a top accounting firm for an audit
Zhongzhi's management disclosed plans to undergo an audit by one of the Big Four accounting firms and pursue potential investors. The company has been selling shares in certain controlled listed firms and reducing its operations in recent years due to China's crackdown on shadow banking and the property market downturn. "The Zhongzhi group deeply apologizes for the losses caused to investors. We fully understand the urgency, importance, and seriousness of resolving this overall risk," the group stated in the letter.
